Credit Crunch Origin

Lots of folks know that the current credit crises exist b/c lenders gave loans to people that shouldn't have gotten them. What most don't know if why they did it. Everyone thinks it was just greed. This is true to some extent but there is an underlying reason for all of this. It turns out that there was about $35 trillion available around the world in 2000 to invest in fixed income investments. That number doubled by 2005. By 2005, there was $70 trillion dollars that needed to be invested in fixed income investments. The reason for the sudden rise in that amount was the fact that all of these small 3rd world companies had become much more wealthy b/c they were participating in the new global supply chain of computers and other technology. They went out seeking fixed income investments for their new money. The U.S. had one of the greatest investments of this type in the world. It was mortgage backed securities. These are bundles of hundreds of home mortgages that are sold as stocks on the stock market. The U.S. market quickly ran short on its supply of these investments. The 3rd world companies still had lots of money to invest, but we didn't have the supply to meet their demand. Slowly, at first, some banks starting loosening their restrictions on lending to try to meet this increased demand. As they did, other banks began to do the same in order to compete. Once the snowball started rolling, there was no stopping it. Restrictions were all but removed in order to feed this ravenous appetite of $70 trillion dollars. And the rest is history. Now the opposite is happening. The demand for mortgage backed securities has dwindled. With that reduction in demand, the banks have had to cut back on supply. This has led to what we call the credit crunch. Banks don't want to give anyone money b/c there is not enough demand for mortgage backed securities.